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Monday, October 6, 2014

HP splits the company

HP splits

HP announced that by the end of 2015
they plan to split the company in two. One of the companies, “HP enterprise”,
will focus on business requirements and will contain the server business, HP's
cloud offering –Helion, HP's enterprise services, and HP financial. The other
company, “HP Inc.” will contain the printer and PC business. HP financial will
continue to provide financial services to both companies.

Several key points

HP ran a conference call to discuss this
announcement and answer questions. Several nuances of the announcement became
clearer during this call. One of the reasons that Meg Whitman, HP CEO, had
decided against splitting off the PC business several years ago was that the
cost advantage from HP’s supply chain would be greatly reduced. That argument
would seem to apply to the current split. After all one of the justifications
that IBM gave for selling the x86 server business was that the Lenovo supply
chain would give a cost advantage. Is HP was throwing away its current
advantage of the unified supply chain? Meg Whitman, HP CEO, says she expects
the two companies would arrange some joint agreements to cover this issue. In
other words, the server folks would be able to leverage the component purchases
of the PC company to get the most favorable prices.

The Wall Street Journal broke the story
only yesterday (Sunday, 10/5) --, although rumors were rife towards the end of
last week. This points to very good management discipline on the part of HP since
they were able to keep this blockbuster story secret until almost the last
minute. The dead story about HP’s negotiations with EMC did leak. Perhaps, this
was part of the management plan to conceal the real story? So far, it appears
that HP has planned properly.

Meg Whitman stated that there would be
three transition offices set up, one in HP corporate and one for each of the
two new companies, keeping the transition teams separate from the team that is
running the day-to-day business. HP wants to ensure that the 2015 results are
good so that the two new companies get off to a good start.

Finally, HP noted that they have
suspended their stock repurchase plan because they are in possession of
non-public information that requires them to make this suspension. When
questioned they said that their M&A activities were involved. It seems that
they think that this issue will be resolved by the end of the year but it is intriguing to speculate on what this “non-public” information might be

Customer Impacts

We do not see any immediate
customer impacts from this announcement. However it is ironic that HP has
pointed out the potential disruption for customers from the IBM sale of its x86
server business to Lenovo. Now HP will have to justify the far larger transition
that it is going to go through to split itself in two. In 2016, customers who
were buying products across HP will have to adjust to dealing with two
companies. Both will still be named HP but as time goes by they will be
different companies.

HP management thinks that since the two companies have the
same name (although the consumer company will have the HP logo) that this
solves the branding issue. The branding issue would have been a huge cost if HP
had spun off the PC business several years ago into a new company with a
different name. We are not so sure about the branding issue being resolved because
in the long run having two companies with essentially the same name may cause some
confusion in the marketplace.

Competitive Factors

It was not mentioned in the call but we think that HP has
decided that they need to position themselves to compete with the new Lenovo.
Meg Whitman emphasized the value of agility in a fast changing marketplace. We
think that HP considered how they will be competitively positioned against
Lenovo going forward. They obviously think that the new structure with two
companies competing with Lenovo instead of one would be an advantage for them.
Time will tell but it’s clearly important for HP to make the right call here.

We have heard from some people in IBM that HP and IBM are
not going to be competitors going forward. We think that is a serious mistake
by IBM. The HP enterprise company is going to double down on the Cloud and
other areas such as enterprise services where they will be directly competing
with IBM for the customer’s business. It would be an error for IBM to underrate
them.

Summary

HP has
announced a major restructuring of the company. We think that HP management
carefully considered this change. It’s too early to judge how successful this
new structure will be. However, Meg Whitman, has built a track record of
successful change at HP. We would not bet against her. It was notable that the
company’s CFO announced during the briefing that they were going forward with
plans to eliminate 14,000 more jobs. They have hit their target of 36,000 but
they have identified the additional positions. They plan to reinvest the
savings in sales and R&D. They believe that these investments will
strengthen the two new companies as they go forward.